Deed Of Trust/Fee Clause Interpretation: Where Junior Lienholder Paid Off And Extinguished Senior Secured Debt, Senior Lender Prevailing In Post-Payoff Action Not Entitled To Recoup Attorney’s Fees

 

DOT Fee Provision Was Specific, Not Allowing For Fee Recovery Under The Circumstances.

     The next case should be of interest to real estate secured lender attorneys, counseling on what they may need to do in certain payoff/junior lienholder foreclosure situations. It also may counsel some changes to the standard deed of trust instruments which are recorded many, many times in order to garner contractual fee recovery in situations like the one we will now describe.

     Tyler v. Wells Fargo Bank, N.A., Case No. E063985 (4^th Dist., Div. 2 July 8, 2016) (unpublished) was a situation where real estate senior lienholder had its debt paid off by the junior lienholder, which eventually foreclosed on the debtor’s property. However, debtor sued senior lienholder and others for wrongful foreclosure and other claims, with senior lienholder eventually winning and then seeking to recovery contractual attorney’s fees under a deed of trust provision. Both the lower and appellate courts determined that the lender was not entitled to recover fees from the losing plaintiff.

     The reason? The deed of trust fee provision was very narrow and specific, only allowing the senior lienholder to add fees to the debt secured by the property. In this particular case, the senior lien had been paid off and extinguished such that the fees could not be added to anything. In coming to this result, the appellate court found persuasive the reasoning in a federal decision, Valencia v. Carrington Mortg. Servs., LLC, 2013 U.S. Dist. LEXIS 88886 (D. Hawaii 2013).

     BLOG COMMENT—This result might counsel redrafting DOT provisions which add fee expenditures to the secured debt. Given that the senior lienholder incurred costs after payoff of its debt and post-foreclosure by the junior lienholder, the only way to recoup fees was if the fees provision was worded differently. This decision, although unpublished, should have some lenders giving consideration to restructuring some deed of trust clauses—especially given that the senior lender could not obtain any increased moneys as a payoff from the junior lienholders given that the attorney’s fees were incurred in a much downstream action occurring after the senior lien had been extinguished.